Corporate-Bond Investors Shrug Off Detroit’s Blues

DTE Electric Co., which provides electricity in the city and surrounding area, sold $400 million worth of corporate bonds on Tuesday, about a month after the Motor City filed the largest municipal bankruptcy in history. A person familiar with the sale said underwriters received more than $700 million in orders.

Representatives for the utility’s parent company, DTE Energy Co., said they did not expect Detroit’s bankruptcy to have a material impact on the organization. In February, Moody’s Investors Service upgraded DTE Electric’s long-term rating one notch to A3, citing a “constructive legislative and regulatory environment.”

The bonds being sold on Tuesday are expected to carry a higher rating, of A1, because the debt is backed by DTE Electric’s property. The debt will mature in about 10 and a half years. Proceeds from the sale will be used to repay outstanding debt and for general corporate purposes.

Detroit filed for bankruptcy on July 18, after years of economic decline and population exodus. The filing has rankled the municipal-bond market, which has been viewed as relatively safe, because investors are worried that the city’s emergency manager, Kevyn Orr, will try to force losses on buyers of the city’s debt.

“People are going to pay for electricity, especially in areas that have bitter winters,” she said. “No matter what shambles the government is currently in, it doesn’t necessarily indicate that they’re going to stop operating.”

The bonds offered 0.87 percentage point in extra yield over comparable U.S. Treasurys, for a yield of 3.697%. That’s actually less relative compensation than when DTE sold similar bonds in June 2012. At that time, DTE offered 1.05 percentage points in extra yield. Higher yields indicate lower prices.

On Monday, another utility, Entergy Louisiana LLC, sold $325 million in similar bonds that offered 1.20 percentage points in extra yield, or spread, compared to Treasurys. That deal was expected to be rated a little lower, at A3.

“While there can be questions about which one is a stronger parent company, they both have their share of challenges,” said Scott Kimball, portfolio manager at BMO TCH, which oversees $8.5 billion in assets and did not purchase any DTE bonds. “From my seat, you’d be better off buying a wider spread for what is probably pretty similar risk.”

Detroit had been distributing electricity to about 115 customers in the city, such as public institutions, but in June Mr. Orr said the city would be getting out of the business and transfer those customers to DTE. The city had been losing an average of $150 million annually over the last five years by running its own electric system.